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  • Kohelet Economic Forum November 2016 | Tishrei 5777

    2016

    Israel's Pathto Economic and Social Prosperity

    Editors: Michael Sarel & Itamar Yakir

    A s t o r y i n 2 5 c h a r t s

  • Israel's Path to Economic and Social ProsperityA story in 25 charts

    All rights reserved by Kohelet Policy ForumDesign and illustrations by Aaron Friedmann, Dov Abramson Studio

    Printed in Israel 2016-5777ISBN: 978-965-7674-34-5

  • Compact Edition | November 2016 | Tishrei 5777

    Israel's Path to Economic and

    Social ProsperityA story in 25 charts

    Editors:Michael Sarel & Itamar Yakir

    Published by Kohelet Economic ForumSponsored by the Tikvah Fund

  • Participants in the preparation of the book:

    Dr. Michael Sarel Head of Kohelet Economic Forum

    Former Chief Economist at the Ministry of Finance and Director of State Revenue Administration, Research and International Affairs. Headed the economic and research department of Harel Insurance and Finance Group. Worked at the International Monetary Fund, the Bank of Israel and the Finance Ministry. Earned his PhD in Economics at Harvard University and his BSc in Computer Science and Economics at the Hebrew University in Jerusalem.

    Dr. Asher Meir Director of Economic Research at Kohelet Policy Forum

    Dr. Meir has worked in academia, in the public sector, in a number of research organizations and in the private sector. These include the US Council of Economic Advisers, the NBER, World Bank and Taub Center. He obtained a PhD in Economics from MIT and a BA in applied mathematics from Harvard University.

    Itamar Yakir Research economist at Kohelet Economic Forum

    Holds an MA in Public Policy, and a BA in PPE (Philosophy, Political Science and Economics) and the Amirim honors program, both from the Hebrew university in Jerusalem. As a fellow of the Milken institute he interned at the ministry of welfare, planning division. Previously, he has served for two years as an economic consultant to governmental agencies.

    Itzik Pinhas Research economist at Kohelet Economic Forum

    Research student in the MA program in economics at the Department of Economics at the Ben-Gurion University of the Negev. Completed his BA in economics and philosophy at Ben-Gurion University of the Negev. Has worked as economist in the Israeli Employment Service and in the Israel Tax Authority.

    Amir Feder (Former) Research economist at Kohelet Economic Forum

    PhD candidate in Economics, Northwestern University. Holds a BA in Economics and history from Tel-Aviv University and an MA from the joint research program at the Hebrew University and Tel-Aviv University.

    Research Assistants:

    Yarden Maimon, BA student in the PPE program (Philosophy, Political Science and Economics) and the MBA direct track, at the Hebrew University. Daniel Wood, BA student in the PPE program, at the Hebrew University. Shmuel Applbaum, BA student in the PPE program, at the Hebrew University.

    The editors and authors of the book wish to thank Ori Katz, Omer Moav, Lev Drucker, Mark Feldman and Meir Rubin for their useful remarks.

  • SUCCESSES

    Over the past decade the Israeli labor market has improved dramatically: unemployment decreased and the participation rate grew. In both measures, Israel now ranks among the leading group of developed countries.

    Although many of the workers who joined the labor market during the 2000s were unskilled, the average real wage has increased over the past years by 15%.

    The main trends in labor and income have led to an improvement in the average households standard of living and to a decline in Inequality, especially in terms of economic income.

    The effective tax on labor is lower in Israel than in other developed countries.

    The reduction in the corporate tax rate was accompanied by an increase in government revenues from this tax.

    Although gaps in educational achievement between different

    population sectors are still significant, students in Arab localities increased their passage rate of matriculation exams, and especially in Druze localities.

    The Israeli health system is relatively successful, despite low levels of inputs and expenditure.

    4 Israel's Path to Economic and Social Prosperity

  • OBSTACLES

    The productivity gap between Israel and other developed countries has grown since the 1980s. This is a product of the high barriers that characterize the Israeli marketplace; and the large fraction of Israeli youngsters lacking basic skills, among other factors.

    Haredi men and Arab women are characterized by low employment rates and wages regardless of education level, resulting in significant gaps in per capita income between the main population groups of Israeli society.

    The proportion of non-Haredi Jews in the population is projected to shrink considerably in the coming decades, and correspondingly the share of the Haredi population will increase. As a result, if current levels of employment and wages in the Haredi and Arab population remain the same, per capita income would be lower by 15% compared to the projection assuming static population composition.

    Without further changes in the retirement age, the duration of

    retirement is expected to increase by a factor of 1.5 for men and even more for women.

    Israel's education expenditures are close to the median of developed countries, but performance is quite low by international standards.

    5Israel's Path to Economic and Social Prosperity

  • SUCCESSES

  • 79.9%

    ParticipationUnemployment

    2%

    4%

    6%

    8%

    10%

    12%

    72%

    74%

    76%

    78%

    80%

    82%

    2000

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    2011

    2012

    2013

    2014

    2015

    11.7%

    75.4%

    4.6%

    Source: Bank Of Israel

    Over the past decade, the Israeli labor market has seen a decrease in unemployment and an increase in the rate of participation.The labor market recovered quickly from the world economic crisis in 2008 and has improved consistently over the past decade, as reflected by trends in the rates of participation and unemployment.

    Changes in welfare policy helped to reduce reliance on transfer payments and encourage greater labor-force participation, especially among low-skilled employees. This led to a broad increase in the welfare of the Israeli population, including a decrease in poverty and inequality.

    Participation and unemployment rates (ages 2564) Quarterly chained data, seasonally adjusted

    9Israel's Path to Economic and Social Prosperity Successes

  • Source: OECD.Stat

    The unemployment rate in Israel is low and the participation rate is high relative to other developed countries.

    Participation rate (ages 25 64), Israel and the OECD countries

    0%

    10%

    20%

    30%

    50%

    60%

    70%

    80%

    90%

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    Mexic

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    Icelan

    d

    Switz

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    20142007

    20142007

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    Luxem

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    Finlan

    dSp

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    Portu

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    Cana

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    Repu

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    Unite

    d King

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    Japan

    Nethe

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    Denm

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    79.5%

    7.3%5%

    Unemployment rate (ages 25 64), Israel and the OECD countries

    10 Israel's Path to Economic and Social Prosperity Successes

  • * The quality matriculation exam meets the minimum requirements of the universities

    Source: Kohelet Economic Forum processing of OECD data

    Students in Arab localities increased their passage rate of matriculation exams between 2002 and 2014, but still lag behind students in Jewish localities. Druze towns surpassed even the Jewish towns in their overall rate of passage.

    Pass rate for matriculation exam among 201 local authorities

    67.6%

    72.9%

    61.1%

    55.2%

    47.6%49.9%

    20%

    30%

    40%40%

    50%

    60%

    70%

    80%

    56.3%

    51.6%

    45.5% 46.2%

    24.2%

    29.7%

    20%

    30%

    40%

    50%

    60%

    70%

    80%

    Arab localitiesincluding Druze (81)

    Druze localities (14) Jewish localities (120) Arab localitiesincluding Druze (81)

    Druze localities (14) Jewish localities (120)

    2002 20142002 2014

    Quality Matriculation*Ordinary Matriculation

    11Israel's Path to Economic and Social Prosperity Successes

  • 31% 35% 28%

    62%

    28%

    112%

    25%

    97%

    26%16%

    0%

    20%

    40%

    60%

    80%

    100%

    120%

    45-54 15-44

    Age groupsJews

    +55Jews & others(excl. Haredi)

    Haredi

    Religion

    Jews &others(incl. Haredi)

    Arabs

    Sex

    MenWomenTotal

    * Haredim: by most recent educational institution

    Source: Kohelet Economic Forum processing of CBS Income Surveys

    Labor market expansion over the past decade was disproportionately driven by the increase in the participation of women, Arabs, Haredi (ultra-Orthodox) Jews, and those over age 55.The groups that entered the labor force in large numbers have relatively low levels of experience and skills.

    As a result, the reported average wage increased less than it would have under a static labor-force composition.

    Percent change in salaried employment among selected groups, 2002-2011

    12 Israel's Path to Economic and Social Prosperity Successes

  • Arabs:+62%

    Haredi Jews:+112% Elderly population:

    +97% Women:+35%

    Labor market participation increased dramatically among certain groups between 2002 and 2011

    13Israel's Path to Economic and Social Prosperity Successes

  • 98

    100

    102

    104

    106

    108

    110

    112

    114

    116

    118

    98

    100

    102

    104

    106

    108

    110

    112

    114

    116

    118

    1997

    1998

    1999

    2000

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    2011

    2012

    2013

    2014

    2015

    1997

    1998

    1999

    2000

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    2011

    2012

    2013

    2014

    2015

    * 1997 was chosen as the base year due to the similarity in GDP gap (the gap between actual GDP and full employment GDP) between the late 1990s and the past few years.

    Source: Kohelet Economic Forum processing of CBS data (left figure) and BOI data (right figure)

    Average real gross wages have increased a lot over the past few years, surpassing in 2015 the previous peak from the boom year of 2001. In the period between 1997 and 2015, both wages and the employment rate increased by roughly 15%.

    Employment rate, ages 25-64 (index: 1997=100) Average real (gross) wages for salaried position (index: 1997=100)

    14 Israel's Path to Economic and Social Prosperity Successes

  • Employment:+15%

    Average real gross wages:+15%

    There was a significant increase in real wages and in the employment rate between 1997 and 2015

    15Israel's Path to Economic and Social Prosperity Successes

  • -1.5% -3.4%

    Income per standard person increased at a higher rate due to the decrease in the number of persons per households

    Households' net income increased at a higher rate due to the increase in economic income and the decrease in income-tax ratesHouseholds income from

    salaried work increased at a higher rate due to the increase in the number of wage-earners

    Real wage increased by almost 5%

    Income from salaried work per

    employee

    CPI Income from salaried work per employee,

    2014 prices

    Number of wage-earners

    Households income from salaried work

    Households gross money income from all sources

    Households net money income from all sources

    Persons per household

    Standard persons per household

    Real net income per standard

    person

    40.4%

    34.2%

    4.6%8.4%

    13.3%16.7%

    28.0%32.5%

    * 1999 was selected as the base year because of the abnormal incomes of the boom year of 2000.

    ** The real wage per salaried worker increased less then the real wage per salaried position, which increased by 6% in this time period.

    Source: Kohelet Economic Forum processing of CBS expenditure surveys

    The average households standard of living increased significantly over the past 15 years. Multiple simultaneous developments contributed to this outcome.

    Changes in the economic and socio-demographic characteristics of household headed by a salaried worker , 19992014*

    16 Israel's Path to Economic and Social Prosperity Successes

  • * "Total income" refers to monetary and non-monetary (in-kind) income, such as imputed income for self-used housing.

    Source: Kohelet Economic Forum processing of CBS and National Insurance Institute data

    Inequality of economic income among households dropped markedly over the past decade, while inequality of net income and of consumption expenditures decreased more gradually. The difference in trends reflects the timing of benefit cuts and the speed of the labor market response.

    Gini indices of inequality Gini indices of inequality by types of income, 2014

    0.25

    0.30

    0.35

    0.40

    0.45

    0.50

    0.25

    0.30

    0.35

    0.40

    0.45

    0.50

    1997

    1998

    1999

    2000

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    2011

    2012

    2013

    2014

    Inequality of economic income

    Inequality of net income

    Inequality of consumption expenditure

    The level of inequality for total income is lower than the more commonly used measure based on money income, because money income does not include economic income derived from owner-occupied dwellings. In Israel, low-income populations including Arabs and Haredi Jews are characterized by considerable home-ownership rates.

    Inequality of consumption expenditure

    Inequality of net income

    Inequality of economic

    income

    0.478

    money total money total money total

    0.438

    0.3710.351

    0.332

    0.301

    0.3890.371

    0.3260.301

    0.4780.541

    17Israel's Path to Economic and Social Prosperity Successes

  • * Effective tax rates - the actual tax collected relative to the tax base - substantially affect the activity of the economy. For this reason, economic policies should take them into account. In addition, an international comparison of statutory tax rates (rates set by law) does not present the whole picture, because countries differ in the structure of the tax system and the level of tax benefits.

    ** The analysis was done by the method shown in Mendoza et al. (1994). The years that are listed in every series are the years with data available for them, and the OECD average does not include Iceland, Luxembourg, Turkey, Mexico and Greece.

    Source: Kohelet Economic Forum processing of OECD data

    The effective tax* on labor is lower in Israel than in other developed countries.The effective tax rate on labor in Israel has decreased significantly in recent years, from 30% in 2000 to 23% in 2013, 10 percentage points lower than the OECD average.

    The effective tax rate on consumption at the end of the 1990s was about 21% - higher than the OECD average. In 2000 it was reduced to 19%, a rate slightly lower than the OECD average.

    In 2014 there was a slight increase in the effective rate of the two types of tax.

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    15%

    17%

    19%

    21%

    23%

    25%

    27%

    29%

    31%

    33%

    35%

    1995

    1996

    1997...